Analysis Of Woolworths Financial Statements And Economic Outlook
Company Background
The company belongs to the organised retail segment with majority of the revenues coming from the supermarket segment. The company is the largest supermarket in Australia with an estimated market share of 35%. The company has a virtual duopoly in the supermarket space where the other noticeable vital is Coles. The company made a humble beginning in 1924 with only one store and being a discount retailer. The growth over the years has been a judicious mix of both organic and inorganic growth. The company as a result has made foray in a plethora of businesses such as departmental stores, hotels, home improvement, general merchandise, beverages, liquor along with fuel. The company has sold the fuel business in FY2018. A significant portion (about 90%) of the revenue and overall profits for the company is obtained from Australia and New Zealand. The company does have presence in 7 other countries but these are still in their nascent stages and hence these do not contribute in a significant manner to the business. The company has over 200,000 employees as on March 31, 2018 and has been listed on the ASX (Australian Stock Exchange) since 1993. There are more than 3,700 stores that the company has all across Australia including all different formats but the major source of profits continues to be supermarket division with a share in profit of greater than 50% (Woolworths, 2017).
With regards to the financial statements, there are three key elements namely income statement, balance sheet and cash flow statement that have been analysed below on the basis of FY2018 annual report.
Income Statement
The operating revenues for the company have registered a growth of about 4% in FY2018 when compared to FY2017. This may be attributed to the company enhancing the focus on customers and making suitable changes based on customer feedback thereby enhancing their overall experience. The net result is that the food and beverages have led to significant growth in the topline in a year when there was an improvement in the consumer confidence both in Australia and New Zealand. Despite the topline witnessing a growth lower than 5%, the net profit from continuing operating has increased by about 10% which is indicative of the enhanced margins for the company owing to the relentless focus of the company to reap cost efficiencies by improving the productivity of operations. Another key observation related to the decrease in the interest expenses which in FY2018 have reduced by $ 40 million as against FY2017. This is on account of continuous debt reduction on part of the company. The net result of higher revenue aided by higher margins is that the EPS for the company has enhanced from $ 1.19 in FY2017 to $ 1.33 in FY2018 (Woolworths, 2017).
Income Statement
Balance Sheet
There has been an increase in the current assets of the company from $ 5,877 million as on June 30, 2017 to $ 6,360 million as on June 30, 2018. This increase is primarily driven by the increase in cash and cash equivalents which has gone up by nearly 30%. However, after considering the assets for sale, then the change in current assets is quite negligible. With regards to non-current assets, the total balance has shown an increase as on June 30, 2018 compared to the corresponding figure as on June 30, 2017. The main contributor in this regards is from PP&E assets which have gone up by $ 600 million in FY2018. This highlights the continuous investment that the company is making in opening new branches and increasing reach to customers in different geographies. In the context of current liabilities, there is a jump seen which is primarily on account of increase in short term or current borrowings from $ 254 million as on June 30, 2017 to $604 million as on June 30, 2018. However, there has been a significant decline in the non-current borrowing which augers well for the company considering the decline quantum is to the extent of $ 500 million. Further, the deleveraging of the balance sheet is also visible from the fact that during the year FY2018, the paid capital has increased to the tune of $ 440 million besides the rise in retained earnings which has led to increasing total equity as on June 30, 2018 to $10,849 million (Woolworths, 2018).
There has been a decrease to the extent of $ 192 million with regards to generation of cash from operating activities in FY2018 as compared to FY2017. This is primarily on account of the higher cash outflow related to employees and suppliers. There has been an increase in the used cash on investing activities in FY2018 to the tune of $ 79 million when compared to the previous year. This is mainly on account of the lower cash inflows that the company has realised from the sale of existing assets for sale and PP&E. With regards to cash flows from financing activities, the outflow has declined by about $ 650 million in FY2018. The main reason for the same is the decrease in repayment of borrowings to $ 284 million in comparison to $ 1,406 million in FY2017 (Woolworths, 2018).
Balance Sheet
The current economic outlook for the business looks good considering the fact that consumer confidence is high in Australia and the interest rates are still low. This has been aiding the retail sales. However, it is possible that in the near future global growth (including Australia) may be adversely impacted owing to the US China trade escalations. Considering that China is the biggest trading partner of Australia, any major slowdown in China is going to have an adverse impact on the health of the Australia economy. Besides, there is risk with regards to the industry which there is major competition considering the presence of limited players that are trying to enhance their respect market shares. Further, the consumers are quite price sensitive owing to which there is a risk of margins being lower going forward if this competition does not ease further. With the entry of international discount retailers such as Aldi, Costco, the competition in the industry has heated up and expected to remain so. There is additional challenge from online speciality retailers that are also increasing their business and product portfolio (Njobeni, 2017). Further, going forward in the midst of the current global events, it is unlikely that any major growth would come from any international market for the company and thus, the main focus would continue to the Australia where the impact of the global events on growth coupled with monetary policy need to be carefully considered as these can pose risk to the business (Woolworths, 2017).
The key profitability along with market ratios of the company are highlighted as follows (Woolworths, 2018).
It is apparent from the above ratios that there has been a broad improvement in the operational profitability of the company in FY2018 as compared to FY2017. However, in certain aspects the company still lags behind the industry average which is apparent from the comparison of the respective ratios with the respective industry average (Arnold, 2015).
The gross profit margin for the company has expanded by about 40 basis points in FY2018 in comparison to the previous years. These gains have been accounted for by the food business in Australia where there has been prudent inventory management and altered product mix which has comprised of a greater share in the private label. Further these are greater than the industry average which augers well for the company & investors (Woolworths, 2018).
The margins improvement at thee gross level have trickled down to the net level as well as there has been an improvement of 25 bps with regards to the net profits in FY2018 as compared to the previous year. Some decrease in the profitability has been on the rise of operational expenses particularly in relation to branch expansion. The margin contraction has been seen in the New Zealand food business. Margin expansion is visible in the food and beverage business in Australia. The other businesses have had stable margins without any increase. However, these are still lower in comparison to the industry average (Woolworths, 2018).
Cash Flow Statement
The ROA and ROE have shown healthy expansion in FY2018 owing to the increase in net profits from continuing operations on account of both topline increase and margin expansion. Both these ratios tend to be well ahead of the industry average estimates which highlight that the company has had a turnaround year especially after the dismal performance in FY2016 (Woolworths, 2018).
There has been an increase in the EPS of the company in FY2018 owing to higher profits being generated based on continuing operations has been explained before. The effect of discontinuing operations has not been captured as it tends to distort the computations. A positive aspect is the improvement in P/E ratio observed for the stock during FY2018 which may be attributed to the improvement in market share and a turnaround in performance of the company. However, the average P/E for the industry continues to higher indicating that the company is trading at a discount (IBIS, 2018). Owing to improvements in profits the dividends per share has also shown a significant improvement in FY2018 even though it is lower than the industry average.
The key efficiency ratios of the company are highlighted as follows (Woolworths, 2018).
The overall operational efficiency of the company is reflected through efficiency ratios. These are imperative as the resource availability is limited and it is essential that these must be utilised in the most efficient manner so that maximum revenue and profit per unit asset may be generated (Gitman, Juchaou, & Flanagan, 2017).
The asset turnover for the company has saw an decline in FY2018 lower revenue generation ability of the company from the assets on hand. However, a silver lining is that even during the decline, it continues to be above the industry average. In terms of the cash return on assets, there has been a slight decrease in FY2018 which is arising primarily on account of the lower cash flow from operations. However, the fixed asset turnover for the company has improved in FY2018 even though it is below the industry average of 3.75 times. (Woolworths, 2018).
As a result, it would be fair to conclude that in FY2018, there has been a marginal decline in efficiency ratios only but these should be too much of a concern especially if there is no deterioration in these going forward.
The key liquidity ratios of the company are highlighted as follows (Woolworths, 2018).
These ratios tend to provide an estimate of the ability of the company to meet the short term liabilities of the business also referred to as current liabilities. Hence, poor performance of the company with regards to liquidity could lead to a situation of cash crunch which would have an adverse impact on the business operations (Lasher, 2014).
Profitability ratios
There is a decline in the current ratio as on June 30, 2018 when compared to the previous year. The decline is quite marginal and also the industry average is nearby only implying that this ratio does not raise any major concerns for the company the size of Woolworths. Quick ratio has also marginally declined but does not pose any concern as the average industry quick ratio is 2 bps higher. Receivables turnover is quite high which may be on account of assuming all the sales as credit sales which would not be the case. Further, the average collection period is quite small and has not altered during the given period (Woolworths, 2017).
The key gearing ratios of the company are highlighted as follows (Woolworths, 2018).
The long term solvency for the company is measured through the use of gearing ratio which highlights the capital structure along with potential balance sheet leveraging. This is imperative in order to ensure that the going concern assumption remains valid and no risk arises in this regards (Brigham & Houston, 2014).
For the company, there is a decline in the debt to equity ratio which augers well for the company in the current year but the company needs to being down the debt further as it still remains high considering the equity base. The debt ratio for the company also has shown marginal improvement and is much lower than the industry average in FY2018. The equity ratio for the company has improved in FY2018 on account of higher equity which again reduces the overall leverage. The interest coverage has marginally declined but does not impair the ability of the company to meet the interest obligations (Woolworths, 2018).
On account of the above, it can be concluded that there has been an improvement in the overall financial position of the company from the perspective of long term solvency as overall leverage of the balance sheet has come down.
On the basis of the discussion carried out above, it is fair to conclude that the current year i.e. FY2018 has been an improvement over the previous year i.e. FY2017. This improvement has been visible not only in terms of revenue growth but also in the expansion of margins which are superior in the current year. Also, there has been improvement in the company’s financial position as the company has continued to deleverage the balance sheet and become more consumer centric.
Market ratios
A key area of concern for the company is that it might face difficulty in keeping the margins especially in the food segment in Australia which has been responsible for the expanding margins of the company. As there are issues over global growth going forwards, it is likely that the intensity of competition in the industry would intensify even further and thereby the margins may be adversely impacted. This is already visible in the beverages coupled with food business in New Zealand. Also, the fact that the consumers do not tend to be loyal towards brands also further aggravates this fear. Besides, the industry is already quite concentrated, hence further concentration of the industry is highly unlikely as there are big players which are competitors. Also, any such move would also not be approved by the government as it could create a virtual monopoly in the industry (IBIS, 2018). Thus, the way forward for the company is through the enhancement of operational efficiency which would result the company in offering low prices to consumers and enhance the market share. In this endeavour, the company has already spent a $ 1 billion in FY2018 which has reaped benefits as the company has grown in market share. Going forward, it would make more sense for the company to focus on enhance the private label share so as to increase the margins while ensuring that the prices are maintained low (Bruner, 2013).
There are a host of ethical implications associated with insolvency. The first is in the form of losses that would be suffered by the employees and creditors who would have pending dues against the company despite fulfilling their commitment. From the perspective of justice and being fair, such a situation is clearly undesirable. The major sufferers in the process of insolvency would be banks as they would have to take haircuts and might not be able to recover the principal extended. Also, if insolvency becomes a systemic issue , then there would be credit crunch and high finance cost as the banks would be unwilling to lend to businesses (Lasher, 2014). Besides, shareholders would be at loss and hence might be reluctant to invest capital in other public companies which further could add to the cash crunch and higher returns being demanded. The auditing profession would be adversely impacted considering the fact that it is based on trust and high incidence of bankruptcies would betray the inherent trust and lead to loss of employment for the auditing and assurance professionals (Hawawini &Viallet, 2016).
The political environment is a vital factor as it can influence the entry of foreign players which lead to higher competition and hence can impact the business. Any restrictions with regards to entry of new foreign players could lead to better prospects for the company. There are other external environment parameters which also tend to have impact on the business of the company. The economic environment is particularly vital for the retail industry as a recessionary economy would lower the consumer spending. The altering consumer preferences especially with the increasing trend of online shopping have implications to the brick and mortar based retailors. Besides, owing to advancements in technology, there is an improvement in the customer experience coupled with convenience related with online shopping. Besides, legal factors also exist as there are a host of laws and regulations that the industry needs to comply with including labour laws, occupational health & safety, consumer protection and anti-trust (IBIS, 2018).
Considering the above discussion, the selected company does not seem suitable for making an investment considering the fact that future growth looks bleak owing to the major business coming from Australia where it has to focus on protection of market share and keeping margins intact. Taking into consideration the risks in the near future, it makes sense to invest in other stocks which are available at compelling valuations and where future growth potential is relatively higher.
References
Arnold,G. (2015). Corporate Financial Management (3rded.). Sydney: Financial Times Management.
Brigham, E. F. & Houston, J. F., (2014). .Fundamentals of Financial Management (14th ed.). Boston: Cengage Learning.
Bruner, R. F., (2013). Case Studies in Finance (7thed.). New York City: McGraw-Hill Education.
Gitman, L.J., Juchaou, R., & Flanagan, J. (2017).Principles of Managerial Finance (6thed.). NSW: Pearson Australia.
Hawawini, G. &Viallet, M. C., (2016). Finance for Executives (4thed.). London: South- Western College Publisher.
IBIS, (2018).Supermarkets and Grocery Stores in Australia, Retrieved from https://www.ibisworld.com.au/
Lasher, W. R., (2014).Practical Financial Management (5thed.). London: South- Western College Publisher.
Mitchell, S. (2016). Woolworths wore spark talk of full-blown supermarket price war with Coles, Aldi Retrieved from https://www.smh.com.au/business/companies/woolworths-woes-spark-talk-of-fullblown-supermarket-price-war-with-coles-aldi-20160404-gnxikd.html
Njobeni, S. (2017).Aggressive Discounting hits Woolies’ Margins. Retrieved from https://www.iol.co.za/business-report/companies/aggressive-discounting-hits-woolies-margins-7802993
NZPA, (2018).Woolies Losing NZ Market share to Foodstuffs, says analyst. Retrieved from https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10522312
Woolworths (2018) Annual Report 2019, Retrieved from https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf